Advice for sole traders and directors in Scotland struggling with business cash flow problems

Being a sole trader can feel like a lonely existence, even when business is good. You make all the decisions yourself, and have to rely on your own judgement to make the business a success.

When cash flow becomes an issue and you can’t regain control, it can turn into a serious situation. Even if you’re making a profit, this lack of cash could potentially have devastating effects, putting you out of business very quickly.

So what can you do to prevent a decline into insolvency as a sole trader? Here are a few tips to help you get back on solid financial ground.

Know and understand your numbers

It’s crucial to recognise and understand the figures that make up your profit and loss account, and balance sheet. When you’re aware of what they mean in terms of everyday business, and how they interact with each other, you’ll be able to spot potential issues in advance.

How much does it really cost to sell your products or services, for example? Have you included all the specific costs of producing that item, or delivering that service? If you’ve been underestimating the cost-of-sales figure for a while, it could be the reason why cash flow has been an issue.

Additionally, it’s often the length of time taken to collect money in that causes a lack of available working capital. Your cash flow is compromised by regular late payers, even though you’ve delivered your obligations in the contract or arrangement.

Seek professional advice

Although an accountant might be the natural choice of advisor in the first instance, a licensed insolvency practitioner (IP) can offer a fresh perspective using their extensive knowledge and practical experience.

Insolvency practitioners offer valuable guidance at any stage, and can help before you begin to experience financial difficulties. They’ll make sure you understand all the available options, which might include sourcing additional finance during a market downturn for example, or selling one or two assets to boost your working capital.

Cash flow forecasts

Being able to anticipate the cash needs of your business over a period of months is not only very comforting, it’s crucial to staying afloat. It lets you get ahead of problems, highlighting the times when you might need to borrow money.

A cash flow forecast gives you greater control generally – you can arrange extra funding with your bank or other lenders in advance, feel confident that not only will regular liabilities be met, but that growth might also be achievable.

Formal insolvency procedures

Insolvency procedures are sometimes the only option, and can in fact turn a business around by offering the extra time needed to trade out of difficulty. As an example, the Debt Arrangement Scheme (DAS) involves paying your debts in full, but at an affordable rate. It freezes any interest and charges on the debt, and crucially, stops legal action by creditors.

The main point with the Debt Arrangement Scheme is that no debts are written off at the end of the period. As a sole trader you are personally liable for all the debts of your business, and again, a licensed insolvency practitioner would be able to examine your individual circumstances and advise on the most suitable option.

Company Directors

Companies are, by their very nature, incorporated with limited liability status which in many cases is part of the attraction of setting up as a corporate entity. But there are times when a director can be liable for company debts, not least when there are signs of director misconduct (whether intentional or unintentional) or, more frequently, when a director has built up a large directors’ loan account to the point where it is overdrawn. In an insolvency situation, this overdrawn loan account would be an asset of the company and would need to be repaid to realise funds for creditors. In other words, you as a director are in debt to your own company.

In this situation, your company could find itself in a corporate insolvency procedure whilst you could be in a separate personal insolvency procedure such as sequestration.

Next steps

Dealing with long-term cash flow problems is de-motivating, and it can be easy to assume that the business will not recover. Rather than viewing potential insolvency as the end for your business, however, it could mark the beginning of a new stage if you establish effective systems and become more aware of why cash flow is a problem.

Scotland Debt Solutions can help you avoid insolvency. We will identify all the options, and offer guidance on the best way forward. Call one of the team for a same-day consultation free-of-charge.

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Janine

Renton

Four years ago I had bailiffs at my door and my landlord wanted me out on the streets. I had my head in the sand and just buried myself away from bad news, meaning I ignored creditors and my debts kept escalating with late fees, surcharges and penalties. A friend told me about Scotland Debt Solutions and within two weeks I was getting my life back on track.

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Dumbarton

I had pre-conceptions about going bankrupt and thought it would be the worst possible thing that could happen, but entering into a bankruptcy (sequestration) procedure with Scotland Debt Solutions has proved to be a massive turning point for me. I paid off some of my debts through a structured repayment plan and the rest were written off.

Within 12 months I was discharged from sequestration and able to start moving on with my life and building my credit score again.

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